Don't get taken aback by a takeover

As an investor, treat hostile takeovers like a normal M&A deal and then decide whether to stay invested

Investors of Sudhir Reddy-promoted IVRCL would be happy. In the past month, when the Essel Group started picking up shares of the company, IVRCL’s stock has risen 31 per cent, a rare feat in a market where infrastructure stocks have been suffering due to slow movement in projects and high interest burden.

What makes IVRCL’s case more interesting is that the promoter holds only 11.18 per cent, less than Essel’s holdings at 12.27 per cent. No wonder there has been a lot of discussion, even allegations, that Essel is mounting a hostile takeover. Some analysts have even predicted an open offer soon.

The investor is not directly impacted by a hostile takeover, but needs to decide some things. First, though, he or she should not get hassled by the ‘hostile’ word. He should simply look at it like a normal merger and acquisition deal. After that, decide whether to exit by booking profits (or cut losses if the shares were bought recently) if the share prices go up sharply, or hold on to the shares?
 

TAKE A CALL

• If new management is stronger than present one 
  – Stay invested
• If the new management is just another investor 
  – Can exit
• If there is threat of delisting 
  – Exit
• If unsure about the outcome 
  – Exit now, re-enter later

The first decision depends on the company mounting a takeover. If it has strong credentials, it would be good for the target company. So, share prices may continue to do well after the event. Says a senior analyst, “A takeover is executed so that it becomes a valuable proposition for all. One should stay invested in the company getting acquired, because there are chances the share prices may shoot up on a successful takeover.”

One should wait for the open offer price to be announced. When the Securities and Exchange Board of India approves it, the target company announces it to shareholders. The new takeover code says the acquiring company is to make an open offer for an additional 26 per cent on purchase of 25 per cent stake in the target company. Experts say this is a good move, as it will bring better price discovery.

But, if the company taking over decides to delist it, shareholders may not benefit much in the future, as in the case of iGATE Patni, where iGATE decided to delist the company, though it was not a hostile takeover. On the other hand, if the target company is undervalued and the shareholder doesn’t have enough faith in the new management, then he should exit from that firm.

If you are undecided, the best decision would be to exit the stock. If it continues to stay listed and does well, you can always buy again.

MRF, Infosys and Infotech are examples of companies, which also have a low promoter holdings like IVRCL. “But the wealth these companies have created in the past few years is enormous. They are also professionally run. Hence, minority holding alone cannot be concluded to pose a threat of hostile takeovers,” said G Chokkalingam, group chief investment officer of Centrum Wealth Management.